22 March 2022 |

The securities and environmental commission?


It’s official. It’s been in the works for a while – yesterday the SEC approved a new proposal that will require publicly traded companies in the U.S. to disclose significantly more data on their operations’ climate impact. Specifically, the proposal, if it goes through as it stands, will require companies from Apple to Ralph Lauren to report their Scope 1 and Scope 2 emissions, alongside impacts of climate risk, both future and present, on management and strategy. 

Quick refresher, as the SEC describes them, Scope 1 and Scope 2 emissions are:

…direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2) … (see here)

Further, for reporting on Scope 3 emissions, i.e all other emissions that crop up across businesses’ value chains, reporting will be required when the emissions reach a “material” level, or if the company has set emissions targets or goals that include Scope 3 emissions.

E.g., if a company has a net zero target, they’d be required to report all of the emissions associated with their business. Smaller companies sans targets likely won’t need to, yet.

My favorite quote from Gary Gensler on the proposal was:

Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.

Establishing that direct link between climate risks and financial risks is key. As are reporting requirements for companies on their emissions data in general. 

A lot of people cheered at this announcement. It will definitely be a boon for carbon accounting and emissions data reporting companies as well as for companies and consultancies that specialize in identifying and mitigating climate risk for major multinational corporations.

There’ll also be a lot to learn from the data that’s reported, which should offer ammunition to activist investors and policymakers alike.

Perhaps most importantly, this new proposal would force companies to do the hard work of understanding their emissions and reckoning with the scale of the decarbonization challenge confronting them. Many of them operate in states across the country where we’re probably not as far as we think from state-level legislation mandating companies start decarbonizing. Best they get cracking.

Climate risk is financial risk


There will always be pushback against new reporting requirements. Some arguments will focus simply on whether Congress has the constitutional right to establish said new requirements (the ‘overreach camp’).

Others will make somewhat more compelling arguments. One person in particular who wasn’t thrilled (to say the least?): SEC Commissioner Hester Peirce. Her response to the proposal, which she said she would not support, was titled “We are Not the Securities and Environment Commission – At Least Not Yet.”

Tell us how you really feel!

One of her main concerns isn’t just the scope of new disclosure requirements, but the amount of reading between the lines this may introduce. They ask companies to assess climate risks to their business which, while very serious, are hard to accurately forecast, let alone to understand their full potential impact. 

More broadly, I think her concerns that a lot of the new reporting requirements aren’t sufficiently well defined are fair. The risk is causing more confusion than clarity. 

For instance… who’s to say if a company’s Scope 3 emissions are ‘material?’ I’d imagine most companies in the S&P 500 have Scope 3 emissions that would meet my standard of materiality. But I’m sure many of them will try to skirt reporting them, opting instead to find clever ways to argue they aren’t material. 

This quote of hers is important too:

“The Scope 3 materiality confusion stems in part from the fact that Scope 3 emissions reflect not the direct activities of the company making the disclosure, but the actions of the company’s suppliers and consumers.”

If company A buys steel from steel producer B, are the emissions tied up with producing that steel Scope 3 emissions for company B only? Or for company A, who is the end user of the steel? Or for both companies?

If both, the overlap will lead to a significant overstatement of total emissions if you simply tally up everyone’s Scope 3 emissions reports. Which would then be more than a little bit tricky to make sense of in aggregate.


“If you cannot measure it, you cannot improve it.” – Lord Kelvin

This sentiment is popping up everywhere in my reporting right now, whether with respect to digital carbon emissions (more on that Thursday) or now with respect to this comprehensive discussion of emissions reporting requirements for public companies in the U.S.

Understanding and having clear data on emissions and their primary sources is a big step, not just for data analysts, but for decarbonization. We know what the emissions picture globally looks like, and talk about it often. What we don’t do as often is pinpoint specific emissions and emission sources and sketch out plans for how to tackle them.

I also appreciated Gary Gensler’s explicit acknowledgement that ‘climate risks are financial risks’ and that if their own personal health and wellbeing isn’t enough of an incentive, investors and managers alike need look no further than their bottom lines to find motivation to decarbonize.

I’m all for emissions reporting requirements for public companies. I think Scope 3 emissions should be in ‘scope’ for all of these companies, without exception, soon. 

Still, I have reservations with the current state of the proposal. They boil down to this: I see a situation where a lot of money is going to be spent on parsing the regulations themselves and figuring out how to comply in the minimum viable way… instead of decarbonizing.

Emissions reporting requirements are a huge opportunity to boost climate technologies. But if they’re not straightforward, they risk concentrating a lot of benefit amongst a small subset of consultancies and lawyers before a dime ever trickles down to companies and the tech that can actually reduce emissions. I know because I used to work for a consultancy like that, albeit in a very different field. 

And that’s before the proposal gets bastardized even further by lobbyists.

The three things I’d push on are:

  1. Scope 3 emissions are either in or out. No vague ‘materiality’. If there needs to be a longer on-ramp for that reporting, fine.
  2. The extent to which Scope 3 emissions overlap is an interesting question for me. On one side, it can make the data output a lot more difficult to understand in aggregate. On the other hand, it incentivizes companies to work together to reduce emissions they may share. What’s most important is that there’s clear guidance on which Scope 3 emissions calculation frameworks companies are allowed to use (ideally, it’s a short list). The SEC could start with a comprehensive framework like what is proposed here by the Greenhouse Gas Protocol team.
  3. Confine management discusses re: climate risks more. What’s outlined right now is a lot. Investors don’t need pages and pages of 10-Ks to sift through. And the more management has to talk about, the less time they’ll actually spend thinking critically about any one piece. 

Pursuant to #3, what I would read and compare across companies is a shorter, structured template.

Something like… “here’s the top three risks to our business presented by future climate change. We’re doing X, Y, and Z to reduce those risks. Key milestones include A, B, and C.” Companies that want to stick out as leaders and offer more detail still can.  

What’s next? A ~30 day comment period, where the SEC will take feedback (and probably a lot of browbeating from many sides) with respect to the current proposal.